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Research Division

Federal Reserve Bank of St. Louis


Working Paper Series




Which continuous-time model is most appropriate for
exchange rates?



Deniz Erdemlioglu
Sbastien Laurent
and
Christopher J. Neely



Working Paper 2013-024A
http://research.stlouisfed.org/wp/2013/2013-024.pdf



August 2013


FEDERAL RESERVE BANK OF ST. LOUIS
Research Division
P.O. Box 442
St. Louis, MO 63166


______________________________________________________________________________________
The views expressed are those of the individual authors and do not necessarily reflect official positions of
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Federal Reserve Bank of St. Louis Working Papers are preliminary materials circulated to stimulate
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cleared with the author or authors.
Which continuous-time model is most appropriate for exchange rates?
6
Deniz Erdemlioglu
,a
, Sebastien Laurent
b
, Christopher J. Neely
c
a
I

ESEG School of Management, Lille, France.


b
IAE Aix en Provence and Greqam.
c
Research Division, Federal Reserve Bank of St. Louis, USA.
Abstract
This paper attempts to realistically model the underlying exchange rate data generating process. We ask
what types of diusion or jump features are most appropriate. The most plausible model for 1-minute
data features Brownian motion and Poisson jumps but not innite activity jumps. Modeling periodic
volatility is necessary to accurately identify the frequency of jump occurrences and their locations. We
propose a two-stage method to capture the eects of these periodic volatility patterns. Simulations
show that microstructure noise does not signicantly impair the statistical tests for jumps and diusion
behavior.
Key words: Exchange rates, Brownian motion, Volatility, Jumps, Intraday Periodicity,
High-frequency data
JEL: C15, F31, G01
1. Introduction
Which statistical model realistically describes how nancial asset prices evolve over time? Probably,
the rst attempt to answer this question goes back to 1900s, when Bachelier (1900) proposed mod-
eling stock returns with the Brownian motion. Since the seminal work of Merton (1976), however,
researchers have turned their attention to jumps in asset prices. From an economic standpoint, the
ecient markets hypothesis implies that asset prices should react rapidly to news surprises to pre-
vent risk-adjusted prot opportunities. Decomposing volatility into jumps and time-varying diusion
volatility is important because these two components imply dierent modeling and hedging strategies
(Bollerslev and Todorov, 2011a,b). Also, while persistent time-varying diusion volatility would help
forecast future volatility, jumps might contain no predictive information about volatility or even distort
volatility forecasts (Neely, 1999; Andersen et al., 2007a). Therefore, one must model jumps to better
explain asset price dynamics.
One popular class of models that incorporate both Brownian motion and jumps is known as the
6
The views expressed in this paper are solely those of the authors and do not necessarily reect those of the Federal
Reserve Bank of St. Louis or the Federal Reserve System.

Corresponding author. I

ESEG School of Management, 3 Rue de la Digue, Lille, France. Tel: + 32.81.724889. Fax:
+ 32.81.724840.
Email addresses: deniz.erdemlioglu@fundp.ac.be (Deniz Erdemlioglu), s.laurent@maastrichtuniversity.nl
(Sebastien Laurent), neely@stls.frb.org (Christopher J. Neely)
Brownian SemiMartingale with Finite-Activity Jumps (hereafter denoted BSMFAJ) model.
1
This class
of models features two main components: i) a diusionBrowniancomponent to capture the smooth
variation of the price process, and ii) a jump component to account for the discontinuities in the price
trajectories. These models exhibit nite-activity jump intensity, which implies a nite number of jumps
in any interval of time. The compound Poisson process, which exhibits relatively rare and large jumps,
is one example of this class. Andersen et al. (2007b) cite several authors who argue that BSMFAJ
realistically models many asset prices.
More recent studies show that BSMFAJ models fail to approximate the jump dynamics of some
asset prices, however. In particular, the nite-activity jump component of BSMFAJ models may be
too restrictive: It allows only relatively rare and large jumps, despite the fact that high-frequency
nancial data might show many small jumps (At-Sahalia and Jacod, 2011). Lee and Hannig (2010)
document that neither diusion component nor Poisson-type jumps adequately describe frequent and
small jump dynamics. Therefore, the literature (see e.g. Madan et al., 1998 and Carr et al., 2002) has
introduced a new class of models with more general jump structures. These Brownian SemiMartingale
with Innite-Activity Jumps (hereafter denoted BSMIAJ) models include innite-activity Levy processes
(Cont and Tankov, 2004).
2
Under the BSMIAJ model, the diusion component captures the smooth
price variation and the jump component captures both rare and large jumpspotentially caused by
important macro news (Lahaye et al., 2011), as well as frequent and small ones that create risk for high-
frequency trading strategies (At-Sahalia and Jacod, 2012): jumps can arrive innitely often in BSMIAJ
models (Geman, 2002). Li et al. (2012, 2008) show that BSMIAJ models describe stock returns better
than BSMFAJ models.
3
Our paper thus investigates which continuous-time model best describes intraday exchange rate
uctuations? We address the following research questions:
Does an appropriate model need Brownian motion? (Testing for Brownian motion)
Are jumps present in the exchange rates? (Testing for jumps)
If so, do exchange rate jumps have nite or innite-activity? (Testing for innite-activity)
If jumps are present, how frequent or active are they? Which jump process is compatible for
intraday exchange rate series? (Estimating jump activity)
What fraction of the quadratic variation is due to the Brownian motion and jumps? (Relative
magnitude of the components)
The answers have important economic implications. For instance, a BSM modelwith only contin-
uous componentsgenerates dierent risk measures (and premia) than BSMFAJ or BSMIAJ models
(Bollerslev and Todorov, 2011a,b; Drechsler and Yaron, 2011). As Back (1991) shows, consumption-
based asset pricing models (C-CAPM) rely on the continuous part of the returns and hence only char-
1
Semimartingale models are quite useful in nancial economics and continuous-time nance because they rule out
arbitrage opportunities (see Back, 1991).
2
The literature studying innite-activity Levy processes is young but growing rapidly. Examples include the works of
At-Sahalia and Jacod (2009a,b, 2010, 2012), Todorov and Tauchen (2006), At-Sahalia (2004), Carr and Wu (2003, 2004,
2007), Lee and Hannig (2010), Huang and Wu (2004), Carr and Madan (1998), and Bakshi et al. (2008), among others.
3
It is worth noting that BSMIAJ models can exclude the nite activity jump component so that only innite activity
jump component represents the price discontinuities.
2
acterize the diusion risk.
4
Moreover, although BSMFAJ model captures relatively rare jump events,
BSMIAJ can represent frequent small exchange rate moves (At-Sahalia and Jacod, 2012; Carr et al.,
2002).
Few papers address these issues in exchange rate applications. The papers most closely related to
the present paper are those of Todorov and Tauchen (2010) and Cont and Mancini (2011), who also
studied the characteristics of foreign exchange data generating processes, focusing on jump activity and
jump variation, respectively. We conrm some ndings of these two papers. Specically, both papers
use the Blumenthal-Getoor index to estimate jump activity and thus to argue that Brownian motion is
present in foreign exchange data. We use power variation measures to conrm these results. We also
conrm Cont and Mancinis (2011) nding of nite jump variation with estimates of jump intensity.
Our work extends and complements those papers in its methods and in inference, however. Method-
ologically, this paper extends At-Sahalia and Jacod (2012) to the foreign exchange market. We use
a exible testing methodology, along with a long sample of higher frequency (1-minute) data that
should provide better test properties than the 5-minute data used in Todorov and Tauchen (2010) and
Cont and Mancini (2011), on three exchange rates. In addition, we explicitly account for market mi-
crostructure noise and intraday periodicity in volatility. These methodological improvements provide ad-
ditional insights into the foreign exchange data generating process. For example, Todorov and Tauchen
(2010) concludes that Brownian-plus-Poisson-jumps model might be misspecied, although they stress
that this inference depends on the sampling frequency and testing technique. Using higher frequency
data and better tests, we show that a Brownian plus compound Poisson jumps model is indeed plausible.
In addition, our testing procedures allow us to consider whether jumps are appropriate components of
the model and whether nite activity better describes jump activity than innite activity. In modeling
the jump process, we show that accounting for intraday periodicity changes the estimated frequency
and sizes of jumps within the day, as well as reducing the total number of estimated jumps per day. We
also evaluate and reject the hypothesis that microstructure noise dominates the test statistics, rendering
them uninformative.
We organize our paper as follows. Section 2 presents the methodology developed in At-Sahalia and Jacod
(2012). Section 3 extends this technique to account for intraday periodicity. In Section 4, we describe the
exchange rate data and report our empirical results. Section 5 concludes and suggests some directions
for future research.
2. The base methodology
2.1. Theoretical background
In line with previous literature, we assume that the log-price X(t) follows a semimartingale such
that
dX(t) = (t)dt
. .
drift
+ (t)dW(t)
. .
continuous component
+ JUMPS(t), (1)
where dX(t) denotes the logarithmic price increment, (t) is a continuous, locally bounded, variation
process, (t) is a strictly positive and c`adl`ag (right-continuous with left limits) stochastic volatility
4
See Lustig and Verdelhan (2007) who present empirical evidence on the link between aggregate consumption growth
and exchange rate dynamics.
3
process, and W(t) is a standard Brownian motion. The JUMPS component of Model (1) potentially
represents both nite and innite-activity jumps. That is,
JUMPS(t) := (t)dq(t)
. .
nite activity
+ h(t)dL(t)
. .
innite activity
, (2)
where q(t) denotes a counting process (e.g. Poisson process), L(t) is a pure Levy jump process (e.g.
a Cauchy process), and (t) and h(t) denote the jump sizes of the counting and Levy processes, re-
spectively. In the absence of the JUMPS component, Model (1) is known as Brownian SemiMartingale
(hereafter denoted BSM) model.
Assumptions and notation. We assume that the log-price process X(t) in (1) is observed at the discrete
points in time. The continuously compounded ith intraday return of a trading day t is given by
r
t,i
X(t + i) X(t + (i 1)), with i = 1, ..., M and trading days t = 1, ..., T. Let M 1/
denote the number of intraday observations over the day; = 1/M is the time between consecutive
observations, the inverse of the observation frequency.
Some of our test statistics will be functions of truncated power variations, a class of statistics
depending on three parameters: p, the parameter for power variation, u, the truncation parameter, and
k, the sampling frequency parameter. We can now dene the following realized measures introduced in
At-Sahalia and Jacod (2010).
Denitions. Let

B(p, u, )
t
be a truncated power variation computed at the frequency. That is,

B(p, u, )
t
:=
1/

i=1
|r
t,i
|
p
1
{|r
t,i
|u}
, (3)
where u =

is the threshold indexed by (> 0) of standard deviations of the continuous part of the
process for a constant (0, 1/2). The truncation function on the right-hand side of (3) can be used
to exclude large changes (i.e., jumps) from the calculation, which allows us to calculate moments from
the diusion process in presence of jumps. Also note that

B(p, , )
t
is the non-truncated version of
(3), and therefore takes into account the contribution of jumps. It can be used to calculate moments
from the unconditional distribution. We can further consider the reverse version of (3), which can be
used to compute moments of large returns, excluding small returns.
5
That is,

U(p, u, )
t
=
1/

i=1
|r
t,i
|
p
1
{|r
t,i
|>u}
. (4)
To count the number of increments larger than u, we x p = 0, for example. Then, (4) becomes

U(0, u, )
t
=
1/

i=1
1
{|r
t,i
|>u}
. (5)
In summary, we can use truncated power variation functions to compute statistics of diusion returns
5
We distinguish jumps, which are detected by our jump tests, from large intraday returns, which might be informally
considered jumps.
4
and large returns. Armed with this theoretical setup, the next section presents the main hypotheses
and the corresponding testing procedures.
2.2. Hypotheses and test statistics
Throughout this section, we follow At-Sahalia and Jacod (2012) and test four hypotheses:
(A) H
0
: Brownian motion is present vs. H
1
: Brownian motion is not present
(B) H
0
: Jumps are not present vs. H
1
: Jumps are present
(C) H
0
: Jumps have nite activity vs. H
1
: Jumps have innite activity
(D) H
0
: Jumps have innite activity vs. H
1
: Jumps have nite activity
In addition to those above, we further analyze i) how often jumps occur (i.e. degree of jump intensity
test), and check ii) whether market microstructure noise aects the results (i.e. noise test). We test
these hypotheses by computing the following statistics and comparing them to their probability limits
under the various hypotheses.
- To test for the presence of Brownian motion:

S
W
(p, u, k, )
t
=

B(p, u, )
t

B(p, u, k)
t
P

_
k
1p/2
, X has Brownian motion on [0, t]
1, X has no Brownian motion on [0, t]
(6)
- To test for the presence of jumps of any types (ASJ test):

S
J
(p, k, )
t
=

B(p, , k)
t

B(p, , )
t
P

_
1, X has jumps on [0, t]
k
p/21
, X is continuous on [0, t]
(7)
- To test the assumption that jumps have nite-activity:

S
FA
(p, u, k, )
t
=

B(p, u, k)
t

B(p, u, )
t
P

_
k
p/21
, X has nitely many jumps on [0, t]
1, X has innitely many jumps on [0, t]
(8)
- To test the assumption that jumps have innite-activity:

S
IA
(p, p

, u, , )
t
=

B(p

, u, )
t

B(p, u, )
t

B(p

, u, )
t

B(p

, u, )
t
P

p
, X has innitely many jumps on [0, t]
1, X has nitely many jumps on [0, t]
(9)
where > 1, and p

is another parameter for power variation such that p

> p > 2.
The test statistics in (8) and (9) identify which types of jumps are likely to be present in the data
(nite or innite), but they are not informative about the degree of jump intensity. We thus estimate
the degree of activity of jumps with the Blumenthal-Getoor index .
6
The parameter measures the
frequency of activity on a scale from 0 to 2. Activity that occurs nitely oftensuch as Poisson jumps
has an activity level of = 0. Activity that occurs innitely has a positive .
7
For example, Cauchy
6
Other approaches to measure jump activity include the works of Todorov and Tauchen (2010), Belomestny (2010)
and Carr et al. (2002), among others.
7
Gamma process and VG process are exceptions.
5
and Normal Inverse Gaussian (NIG) jumps imply that = 1, and Brownian motion is extremely active
with = 2. We use two estimators proposed by At-Sahalia and Jacod (2009a). That is,

(, ,

, u, u

)
t
=
log(

U(0, u, )
t
/

U(0, u

, )
t
)
log(

/)
, (10)
where u

is another truncation parameter for the xed values 0 < <

. Note that while (10)


is based on computing (5) evaluated at two truncation levels and

, the second estimator, given by

(, , k, u)
t
=
log(

U(0, u, )
t
/

U(0, u, k)
t
)
log k
, (11)
is based on sampling at two time scales and k for k = 2.
The fact that the test statistics (6)(8) have dierent probability limits if microstructure noise
distorts them suciently allows us to assess the importance of such noise for our hypothesis tests. If
the statistics in (6) to (8) converge to k, 1/k, and 1/k, respectively, then we conclude that such noise
renders these test statistics uninformative. That is,
- If market microstructure noise dominates, then the following are true:

S
W
P
k,

S
J
P
1/k,

S
FA
P
1/k. (12)
3. An extension: the role of intraday periodicity
The previous section presents the tools to choose the correct continuous-time model for exchange
rates. This section extends this base methodology to account for intraday periodicity. To do so, we
rst illustrate the presence of periodicity in the real intraday data, then we propose an appropriate
modication of truncated power variation and the ASJ jump test statisticin (7)that corrects them
for the inuence of intraday periodicity.
3.1. Motivation
Foreign exchange volatility shows strong intraday periodic eects caused by regular trading patterns,
such as openings and closings of the three major markets, Asia, Europe and North America. Figure 1
displays distinct U-shaped patterns in the autocorrelation functions (ACFs) for the 1-minute absolute
returns.
8
[ Insert Figure 1 about here ]
Figure 2 illustrates the periodicity by showing mean absolute EUR/USD, USD/JPY and GBP/USD
returns over the (1440) 1-minute intervals.
[ Insert Figure 2 about here ]
The gure indicates that volatility is low during the Far East market hours, from 16:00 EST (21:00
GMT) to 24:00 EST (05:00 GMT) but activity picks up as Europe begins to trade around 2:00 EST
8
We describe the data in Section 4.1.
6
(7:00 GMT), and the Far Eastern market activity begins to wane. The most active period of the day is
during the overlap of the European and North American markets (between 7:00 EST and 11:00 EST).
Volatility starts to decline, as rst the European and then US, markets wind down. At around 16:00
EST (21:00 GMT), the Asian market reopens. This intraday pattern is consistent with those reported
in the literature.
9
Previous studies have shown that periodicity matters i) for estimating and forecasting intraday
volatility (e.g. Andersen and Bollerslev, 1998b), ii) for studying the impact of news on volatility (e.g.
Dominquez and Panthaki, 2006), iii) for estimating co-volatility (Boudt et al., 2011a), and iv) for de-
tecting intraday jumps (Boudt et al., 2011b). This paper shows that periodic volatility is also important
for continuous-time model selection problems.
3.2. The impact of periodicity on the realized power variation
The truncation parameter in the power variation statistics determines the cuto between diusion
returns and large returns and so should depend on the conditional diusion volatility. The test
statistics in (6)(9) assume that the appropriate truncation threshold is constant over the trading
day, however. In this section, we show that ignoring intraday periodicity in volatility distorts the test
properties and we propose a correction. We carry out three Monte Carlo experiments. In Case I,
volatility is only stochastic, and there is no periodic component. In Case II, volatility is both stochastic
and periodic. We hold everything else (such as data generating process, parameter values, etc.) constant
to permit us to analyze the marginal impact of the periodic volatility. In Case III, we correct the testing
procedures to account for periodic volatility in the data generated by Case II. For brevity, we only report
the main results here, and Appendix A presents the details of the simulation setup.
Case I (no periodicity). In this casein the absence of intraday periodicity, we count the number of
intraday returns larger than u =

(in 5) with = 0.47 and = 2.


[ Insert Figure 3 about here ]
The upper panel of Figure 3 plots the total number of estimated large incrementsper 1-minute
intervalin the absence of periodicity. The gure delivers a clear message: as expected, in the absence
of jumps and with constant volatility, the number of observations discarded by the truncated power
variation with constant threshold is uniformly distributed over the day.
Case II (with periodicity). We add periodicity to the data generating process in Case I. The middle
panel of Figure 3 shows that truncated power variation discards too many large returns when periodic
volatility is high and too few when periodic volatility is low. That is, all of the estimated large
increments come from the high volatility portions of the day.
Case III (correction). To solve the problem highlighted in Case II, we replace the threshold u in (4)
and (5) by a time-varying threshold u that is proportional to the intraday periodicity in volatility f
t,i
,
i.e.
u =

f
WSD
t,i

, (13)
9
See e.g. Andersen and Bollerslev (1998b).
7
where the parameters , and are dened as in Section 2.1. To estimate f
t,i
, we use the weighted
standard deviation (WSD), a robust to jumps estimator proposed by Boudt et al. (2011b) (see Appendix
B).
The lower panel of Figure 3 plots the total number of large increments retained by U(0, u, )
t
.
Visual inspection suggests that the periodicity-robust threshold u works quite well: large increments
are uniformly distributed over the day, and U(0, u, )
t
displays no cyclical patterns.
3.3. The impact of periodicity on the size of the ASJ jump test statistic
The experiments in the previous section show that periodic volatility changes the frequency and
distribution of the estimated large intraday returns. We suspect that such a change in the behavior of
large intraday returns may also aect the size of the base jump test statistic

S
J
(p, k, )
t
given in (7).
As before, we consider three simulation cases: non-periodic DGP (Case I), periodic DGP (Case II), and
periodic DGP with correction stage (Case III).
Case I (no periodicity). To evaluate the level of the jump test, we follow At-Sahalia and Jacod (2009b)
and rst standardize the statistic

S
J
(p, k, )
t
by its (consistent) estimator for the asymptotic variance.
The standardized

S
J
(p, k, )
t
is dened as

S
J
(p, k, )
t
k
p/21
_

V
c
t
, (14)
where

V
c
t
is the estimator for the asymptotic variance of

S
J
(p, k, )
t
, and it is based on the truncated
power variation

A(p, ). That is,

V
c
t
=
M(p, k)

A(2p, u, )
t

A(p, u, )
2
t
, (15)
where

A(p, u, ) :=
(1/M)
1p/2
m
p
1/

i=1
|r
t,i
|
p
1
{|r
t,i
|u}
, (16)
with
M(p, k) =
1
m
2
p
(k
p2
(1 +k)m
2p
+k
p2
(k 1)m
2
p
2k
p/21
m
k,p
), (17)
where m
p
and m
k,p
are dened as
m
p
= E(|U|
p
), (18)
m
k,p
= E(|U|
p
|U +

k 1V |
p
), (19)
for U and V , two independent N(0, 1) variables. With the choice of p = 4, At-Sahalia and Jacod
(2009b) show that M(4, k) = 16k(2k
2
k 1)/3. That is, for k = 2, one gets M(4, 2) = 160/3. Under
the null of no jumps (i.e. Hypothesis (B)), the standardized test statistic in (14) is asymptotically (as
0) standard normal.
[ Insert Table 1 about here ]
8
Table 1 reports the probability of rejection of the ASJ jump test (via

S
J
) under the null hypothesis
of no jumps (i.e. Hypothesis (B)).
10
The table indicates that the rejection frequencies in simulations
are nearly correctly sized in the absence of periodicity in volatility, particularly at the higher sampling
frequencies (rst row last three columns). The simulations support the asymptotic theory, with
rejection rates of 5.9%, 6.4% and 8.0% for the 30-second, 1-minute and 5-minute data, respectively.
Case II (with periodicity). As shown in Section 3.1, the intraday volatility has a strong periodic com-
ponent. Thus, we now turn to the case with periodic volatility (second row of Table 1) but a constant
threshold for large returns. Intraday periodicity signicantly increases the rejection rates of the base
jump test (9.2%, 9.5%, 10.7%, from high to low frequency). Nevertheless, periodic volatility tends to
have a little impact on the mean test statistics (middle three columns), which are still around the theo-
retical predictions (i.e. 2). This suggests that periodicity mostly aects the variance of the standardized
test statistic.
Case III (correction). To account for intraday periodicity, we rst estimate the periodic component of
volatility by

f
WSD
t,i
(see Appendix B), and next replace the base threshold u in (16) by a periodicity-
robust threshold u in (13). Our two-stage correction method for intraday volatility patterns reduces
overrejection at all sampling frequencies, but more so at the highest frequencies, 30-seconds and 1-
minute (7.3% and 8.0%, respectively).
11
4. Empirical application
This section describes the data, and reports the results of our empirical analysis.
12
Throughout, we
correct the test statistics and estimators (i.e. (6) to (11)) for the presence of intraday periodicity and
thus use the robust threshold u rather than u.
4.1. Data
We use 1-minute data for the EUR/USD, USD/JPY and GBP/USD exchange rates over a period
from January 1, 2000 to March 12, 2010. Disk Trading provides the last mid-quotes (average of the
logarithms of bid and ask quotes) of 1-minute intervals throughout the global 24-hour trading day.
Following Andersen and Bollerslev (1998a), one trading day extends from 16:01 EST on day t 1 to
16:00 EST on day t.
As is usual in the literature, we omit trading days with too many missing values or low trading
activity because they will provide poor estimates of volatility. Similarly, we deleted week-ends plus
certain xed and irregular holidays, trading days for which there are more than 360 missing values at
the 1-minute frequency (corresponding to more than one fourth of the data), and trading days with
10
Following At-Sahalia and Jacod (2009b), we compute

S
J
for each trading day, consisting of 24 hours of foreign
exchange activity.
11
For brevity, we only report the simulation results under constant volatility model but a stochastic volatility structure
(e.g. GARCH-type) does not change the results.
12
Before applying the aforementioned tests to real data, we assessed the properties of the tests on simulated data with
appropriate parameter values (e.g. p, u, k) and cuto levels (e.g. , ) to ensure that they provide the expected behavior
for realistic sample sizes. Monte Carlo results indicate that all testing procedures perform quite well. For brevity, we do
not report these ndings but they are available upon request.
9
too many empty intervals and consecutive prices.
13
These criteria leave 2483, 2479 and 2472 days,
respectively, for the EUR/USD, USD/JPY and the GBP/USD exchange rates.
4.2. Results
4.2.1. Brownian motion: present or not
The rst question that we ask is the following: Does an appropriate model of high frequency exchange
rates need Brownian motion? To answer this question, we compute the non-standardized test statistic

S
W
(p, u, k, )
t
in (6) for each day in the sample. Figure 4 plots the histogram of these daily statistics
for the EUR/USD, USD/JPY and GBP/USD exchange rates.
[ Insert Figure 4 about here ]
The gure clearly shows that Brownian motion is present in the data. Under the null hypothesis
that the Brownian motion is present (i.e. Hypothesis (A)), we expect the theoretical distribution
of

S
W
(p, u, k, )
t
to be dispersed around k
1p/2
, that is 1.4142 and 1.7321 with (p = 1, k = 2)
and (p = 1, k = 3), respectively. For all exchange rates, the empirical distribution of the non-
standardized

S
W
(p, u, k, )
t
is around 1.5 (k = 2) and 1.9 (k = 3)well above the limit under the
alternative (i.e. 1), indicating that Brownian motion is present in the data. This conrms the results
of Todorov and Tauchen (2010) and Cont and Mancini (2011).
4.2.2. Jumps: present or not
Are jumps present in the exchange rate data? Table 2 reports the results of the At-Sahalia and Jacod
(2009b) jump testbased on (7)applied to EUR/USD, USD/JPY and GBP/USD rates for various
truncation and scaling parameters ( = 0.47, 0.48 and k = 2, 3).
[ Insert Table 2 about here ]
The table shows that the jump test in (7) rejects the null of no jumps (i.e. Hypothesis (B)). For
example, the top row of the table shows that the test detects 162 jumps for the parameters = 0.47
and k = 2, at the 5% level. With the same truncation parameterthat is = 0.47but with higher
scaling (k = 3), the test detects fewer jumps, only 129 for the EUR/USD.
[ Insert Figure 5 about here ]
Figure 5 displays the empirical distributions of the non-standardized (upper panels) and standardized
(lower panels) test statistic

S
J
(p, k, )
t
, computed on the EUR/USD, USD/JPY and GBP/USD data.
For brevity, we plot the histograms only for k = 2. Recall that the empirical densities should be
around 2 under the null hypothesis of no jumps (see Equation (7)). The gure shows that this is not
the case in the real data. Instead, the values of

S
J
(p, k, )
t
are around 1, indicating the presence of
jumps (upper panels). We also observe that the empirical density of the standardized test statistic
(lower panels) signicantly departs from the N(0, 1) density which is the expected density only in the
absence of jumps. That is, the empirical density appears to be skewed and kurtotic. Overall, the
At-Sahalia and Jacod (2009b) jump test indicates that EUR/USD, USD/JPY and GBP/USD returns
contain jumps at the 1-minute sampling frequency during the 2000 through 2010 sample.
13
These holidays include New Year (December 31 - January 2), Martin Luther King Day, Washingtons Birthday or
Presidents Day, Good Friday, Easter Monday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas (December 24 - 26).
10
4.2.3. Jumps: nite or innite activity
Do exchange rate jumps exhibit nite or innite-activity? We rst focus on the nite activity test
(i.e. Hypothesis (C)), and set k = 2 and p = 4 to compute (8). Recall that, for these parameter choices,
we expect the test statistic to be distributed around 2, if jumps have nite-activity, and 1 otherwise.
[ Insert Figure 6 about here ]
Figure 6 displays the empirical distribution of

S
FA
(p, u, k, )
t
for parameters = 6 (left panels)
and = 10 (right panels). For all exchange rate data, the histograms in the gure show that the means
of the distributions of

S
FA
(p, u, k, )
t
range from about 1.4 to 1.7, that is, they are between 1 and
2, which are the theoretical limits under the alternative of innite activity and null of nite activity,
respectively. The gure further reports the mean of

S
FA
(p, u, k, )
t
for = 6, 10that is low and
high as in At-Sahalia and Jacod (2011). The means are about 1.55 (left panels) and 1.65 (right
panels) for the EUR/USD, USD/JPY and GBP/USD series. These are well above 1, which is the
probability limit in the innite-activity case.
As an alternative to the nite activity testvia

S
FA
(p, u, k, )
t
, we now consider a null hypothesis
that jumps have innite activity (i.e. Hypothesis (D)). In this case, under the null hypothesis of innite
jump activity, the test statistic,

S
IA
(p, p

, u, , )
t
, should be close to 2 (for = 2, p

= 4, p = 3).
We reject the null hypothesis of innite activity jumps if

S
IA
(p, p

, u, , )
t
is around 1 (see Equation
(9)). Table 3 reports the empirical means of both test statistics applied to EUR/USD, USD/JPY and
GBP/USD returns.
[ Insert Table 3 about here ]
The lower panel of Table 3 shows that the test in (9) rejects the null hypothesis of innite jump
activity. That is, although the empirical mean of

S
FA
(p, u, k, )
t
is around 1.60 (upper panel),

S
IA
(p, p

, u, , )
t
is close to 1 for all series (lower panel). We therefore conclude that while the rst
test (via

S
FA
(p, u, k, )
t
) accepts the null of nite activity for high values, the second test (via

S
IA
(p, p

, u, , )
t
) rejects the null hypothesis that jumps have innite activity. Thus, we conclude
that 1-minute data tend to be more compatible with nite jump activity, in line with the results of
At-Sahalia and Jacod (2011).
4.2.4. How active are exchange rate jumps?
The empirical resultsreported in Sections 4.2.2 and 4.2.3indicate that nite activity jumps are
present in the exchange rate data. We now analyze the degree of activity of exchange rate jumps, and
ask which jump process is likely to better capture those jumps.
[ Insert Table 4 about here ]
Table 4 reports the estimates of the jump activity index for the EUR/USD, USD/JPY and
GBP/USD returns. Recall that nite activity jumpssuch as Poisson jumpshave an activity level of
= 0 while innite activity jumps have positive s. To be consistent with our (unreported) simulation
study, we choose the cuto levels = 0.47 (left panels) and = 0.40 (right panels).
14
We further
14
These simulation results are available upon request.
11
consider various levels of ranging from 6 to 10 standard deviations of the continuous part of the
process. Table 4 conrms that 1-minute exchange rate data display nite jump activity.

(, , k, u)
t
and

(, ,

, u, u

)
t
, in (11) and (10), range from 0.07 to 0.10for = 6, indicating a low degree of
jump activity, consistent with a compound Poisson process. The standard errors of these estimates are
much larger than the estimates themselves, indicating that we cannot reject the null that they are zero.
Table 4 further shows that increasing (from 6 to 10) moves the index estimates closer to 0,
producing more evidence for large and infrequent jumps, and reduces standard errors. This is expected
because higher gives a larger truncation level u =

f
WSD
t,i

, which allows us to retain relatively


more (small) jumps for computing power variations, leaving larger increments. These results hold for
all exchange rate series.
[ Insert Figure 7 about here ]
To summarize our results, Figure 7 shows the spectrum of the EUR/USD returns, and displays
the three possible limits of the test statistics: i) under the null hypothesis, ii) under the alternative
hypothesis, iii) when market microstructure noise dominates. In line with our previous discussions,
we reject the null of no Brownian motion (top panel), we reject the null of no jumps (middle panel),
and nd evidence in favor of nite activity jumps (lower panel). For all testing procedures, the gure
indicates that microstructure noise does not dominate the results.
15
4.2.5. The relative magnitude of the components
We can also disentangle the quadratic variation (QV ) of the exchange rate process into its continuous
and jump components. That is,
Components
_

B(p, u,)
t

B(p,,)
t
%QV due to the continuous component

U(p,,)
t

B(p,,)
t
%QV due to big jumps

B(p,,)
t

B(p, u,)
t

U(p,,)
t

B(p,,)
t
%QV due to small jumps
(20)
where QV is the sum of the integrated variance and the cumulative squared jumps.
16
In (20), the
function

B denotes truncated power variation; it estimates moments of the diusion process. In contrast,
the function

U is reverse truncated power variation; it estimates moments of the jump process. Also
note that while (6) requires a power p < 2, the test statistic in (7) identies the presence of jumps for
p > 2. To split the QV into its components, we need to x p = 2 so that all components are present
together. The jump size cuto parameter in (20) distinguishes big and small jumps. Larger values of
will mean that a given return will have to be larger to count as a big jump. That is, other things
equal, a larger value of will attribute more variation to small jumps and less to big jumps because
it will pick out fewer big jumps.
15
The spectrographic analyses of the USD/JPY and GBP/USD returns are quite similar, and hence we do not show
the results here in order to save space.
16
The drift term (e.g. (t) in (1)) does not aect QV ; Andersen and Benzoni (2008) discuss this issue. Further,
the integrated variance, the variance of the continuous component, of the underlying log-price process in Model (1)
can be further dened as IV
t

t
t1

2
(s)ds, which is latent because
2
(s) is not directly observable. An unbiased
estimation of IV
t
depends on whether the jump component of the log-price process has nite or innite-activity. See
Barndor-Nielsen and Shephard (2004), Mancini (2009) and Bollerslev and Todorov (2011a) who present alternative es-
timators for IV
t
.
12
[ Insert Table 5 about here ]
Tables 5 reports the percentages of total quadratic variation (QV ) due to each component of the
EUR/USD, USD/JPY and GBP/USD exchange rates. The table indicates that Brownian motion
(QV
Brownian
) drives around 85% of QV for all exchange rates. Jumps represent about 15% of QV (i.e.
QV
big jumps
+ QV
small jumps
). For the cuto level = 0.09, big jumps comprise approximately 1014%
of QV . Raising the cuto level, , from 0.09 to 0.19, increases the proportion of small jumps in the
quadratic variation and reduces the proportion of QV that big jumps explain.
17
[ Insert Figure 8 about here ]
Figure 8 plots the fraction of QV attributable to the continuous and jump components of EUR/USD
rate and for every trading day in our sample. The gures show that %QV of both Brownian and jump
components tend to be rather stable over time (rst and second panels). Although the proportion of
QV due to big jumps increases following the collapse of Lehman Brothers (September 15, 2008), the
QV components appear to be fairly stable during the nancial crisis.
18
4.2.6. Intraday periodicity and jump detection
In Section 3.3, the simulation evidence reveals that the ASJ jump test tends to over-reject in the
presence of periodicity. We now apply the basic and periodicity-robust ASJ jump tests to real data.
Table 6 reports the results of the ASJ test when we ignore periodicity (row No), and when we account
for it (row WSD).
[ Insert Table 6 about here ]
The table shows that the periodicity-robust ASJ test always identies fewer jumps than the basic test.
For instance, at the 10% signicance level (column j = 0.10) and for = 0.47, the basic testi.e., no
correction for periodicity in volatilitydetects 189 daily EUR/USD jumps whereas the corrected tests
identify 156 jumps.
[ Insert Figure 9 about here ]
Furthermore, the left panels of Figure 9 plot the total number of large exchange rate returns per (1-
minute) intraday period that are retained by (5)s indicator function. Without a correction for intraday
patterns in volatility, most of the estimated large increments occur during the high volatility periods
when European and North American markets are open.
We repeat the same exercise but now correct for intraday volatility patterns by replacing (5) by its
periodicity-robust version. The right panels of Figure 9 illustrate that the patterns change signicantly,
and cyclicality largely disappears. That is, we obtain more uniform occurrence of large returns when
we estimate periodicity by WSD and permit truncation levels to vary with these periodicity estimates.
17
In unreported simulation results, we tested whether the base ratio

B(p,u,)
t

B(p,,)
t
in (20) is around 1 under the null
hypothesis of no jumps. At the 1-minute sampling frequency, we found that Monte Carlo mean values are indeed around
0.99 when we choose the truncation levels = 0.47 and = 3. For lower truncation values such as = 2, the ratio
becomes 0.89, and hence it tends to underestimate the proportion of QV due to the continuous component. The volatility
process (constant or GARCH) does not aect these simulation results. We thus set = 0.47 and = 3 when applying
the QV statistic to the real exchange rate data. These results are available upon request.
18
The results are similar for other exchange rates and thus we do not report them to save space. Further, we do not
specically study here how crisis periods aect the spectrum analysis. Recently, Dungey et al. (2011) propose alternative
test statistics doing this job by discriminating good and bad market times.
13
5. Conclusion
This paper shows that exchange rate variation over short time scales is mostly Brownian-driven
(85%) but that jumps contribute a substantial proportion of the variation, 15%. Using a variety of
statistics based on power variation, we nd that foreign exchange jumps have nite activity, and a
compound Poisson process is a good candidate to capture exchange rate jumps. We also demonstrate
that the diusion and jump tests have good properties in 1-minute data, even in the presence of
microstructure noise.
Failing to account for periodic volatility has two important eects: First, truncated power variation
identies too many (few) large intraday returns during periods of high (low) volatility. Second, the
jump test detects too many jumps, unconditionally. We propose a correction procedure that lters out
these time-of-day eects from the high-frequency data.
Further research can explore at least two issues. First, one can use the test of At-Sahalia et al.
(2012) to detect jumps at very high frequencies (such as 5-second) when market microstructure noise
dominates at those frequencies. Second, following Dungey et al. (2011), a study of the dierential
behavior of exchange rate volatility and jumps during crises and normal times is very likely to provide
new perspectives on this topic.
Acknowledgments
We thank Mardi Dungey, Marius Matei, Jean Jacod, Michel van der Wel, and participants at the third
Humboldt-Copenhagen Financial Econometrics Conference, Universite Catholique de Louvain CESAM
seminar, Bogazici University Annual CEE Conference, and I

ESEG School of Management Finance


Seminar for valuable comments and helpful suggestions.
14
Appendix A. Monte Carlo study of the periodicity analysis
Case I. We consider three sampling frequencies: 30-seconds (i.e. M = 2880), 1-minute (i.e. M = 1440),
and 5-minutes (i.e. M = 288). We set T = 250, and the number of replications is 1000. The DGP is a
BSM diusion model with constant volatility:
dX(t) = (t)dW(t) (21)
(t) =
constant
=

0.30 (22)
Cases II and III. While the simulation setup of Case I remains same, we now specify (t) as a multi-
plicative process of the periodicity function f((t)), a exible Fourier form (FFF), which depends only
on the time of the day (t), and a constant volatility process:
dX(t) = (t)dW(t) (23)
(t) = f((t))
constant
(24)

constant
=

0.30 (25)
log f((t)) =
4

j=1
(
j
cos(2(t)j) +
j
sin(2(t)j)) (26)
where the cos and sin terms depend on the time of the day and we use the following estimated param-
eters:
(
1
,
1
, . . . ,
4
,
4
) = (0.24422, 0.49756, 0.054171, 0.073907,
0.26098, 0.32408, 0.11591, 0.21442).
Remark. We repeat the simulation exercises above by using a stochastic volatility structure (i.e. GARCH-
type diusion process). The results do not change and thusfor brevitywe do not report those ndings
in the main text.
Appendix B. Volatility dynamics and periodicity estimation
Let us consider a Brownian model (BSM) without any JUMPS component but with intraday periodicity
in volatility. If is suciently small, then returns are conditionally normally distributed with mean
zero and variance equal to the integral of underlying volatility over the short interval.

2
t,i
=
_
t+i
t+(i1)

2
(s)ds, (27)
that is r
t,i

t,i
z
t,i
, where z
t,i
N(0, 1). We assume that the high-frequency return variance
2
t,i
in
(27) has a periodic component f
2
t,i
which represents the intraday periodic features.That is,

t,i
= s
t,i
f
t,i
, (28)
where s
t,i
is the stochastic intradaily volatility, constant over the day but varying from one day to
another.
19
The periodic factor f
t,i
is a deterministic function of time within a day. One can estimate
s
t,i
using the square root of the realized volatility on day t by setting p = 2, u = and k = 1 in (3).
That is,
s
t,i
=
_
1
M

B(2, , )
t
. (29)
19
See e.g. Andersen and Bollerslev (1998a), Hecq et al. (2011), and Visser (2010) who also assume that s
t,i
is constant
over the day but can vary from day to another.
15
In the presence of jumps (e.g. BSMFAJ model), the square root of Barndor-Nielsen and Shephard
(2004)s bipower variation estimates the diusion variance, s
t,i
, better than (29). That estimator is
s
t,i
=
_
1
M 1
BV
t
, (30)
where
BV
t

2
1
M
(M 1)
M

i=2
|r
t,i
||r
t,i1
|, (31)
where
1

_
2/ 0.79788. Under this representation, the standardized high-frequency return
r
t,i
= r
t,i
/ s
t,i
N(0, f
2
t,i
) as 0. This result suggests estimating the periodicity factor f
t,i
in (28)
using an estimator of the scale of the standardized returns. That is,
r
t,i
=
r
t,i

BV
t
, (32)
where BV
t
is given in (31). Boudt et al. (2011b) recommend the use of the Shortest Half scale
estimatorproposed by Rousseeuw and Leroy (1988), because this estimator remains consistent in the
presence of innitesimal contaminations by jumps in the data. To dene the Shortest Half scale estima-
tor, we denote the corresponding order statistics r
(1);t,i
, . . . , r
(n
t,i
);t,i
such that r
(1);t,i
r
(2);t,i
. . .
r
(n
t,i
);t,i
. The shortest half scale is the smallest length of all halves consisting of h
t,i
= n
t,i
/2+1 con-
tiguous order observations. These halves equal {r
(1);t,i
, . . . , r
(h
t,i
);t,i
}, . . ., {r
(n
t,i
h
t,i
+1);t,i
, . . . , r
(n
t,i
);t,i
},
and their length is r
(h
t,i
);t,i
r
(1);t,i
, . . ., r
(n
t,i
);t,i
r
(h
t,i
);t,i
, respectively. The corresponding scale es-
timator (corrected for consistency under normality) equals the minimum of these lengths:
ShortH
t,i
= 0.741 min{r
(h
t,i
);t,i
r
(1);t,i
, . . . , r
(n
t,i
);t,i
r
(n
t,i
h
t,i
+1);t,i
}. (33)
The Shortest Half estimator for the periodicity factor of r
t,i
equals

f
ShortH
t,i
=
ShortH
t,i
_
1
M

M
j=1
ShortH
2
t,j
. (34)
The shortest half dispersion is highly robust to jumps, but it has only a 37% relative eciency under
normality of the r
t,i
s. Boudt et al. (2011b) show that the standard deviation applied to the returns
weighted by their outlyingness under the ShortH estimate oers a better trade-o between the eciency
of the standard deviation under normality and robustness to jumps. That is,

f
WSD
t,i
=
WSD
t,i
_
1
M

M
j=1
WSD
2
t,j
, (35)
where
WSD
t,j
=

_
1.081

n
t,j
l=1
w[(r
l;t,j
/

f
ShortH
t,j
)
2
]r
2
l;t,j

n
t,j
l=1
w[(r
l;t,j
/

f
ShortH
t,j
)
2
]
. (36)
Because the weighting is applied to the squared standardized returns, which are extremely large in
the presence of jumps, Boudt et al. (2011b) recommend the use of the hard rejection with threshold
equal to the 99% quantile of the
2
distribution with one degree of freedom, that is
w(z) =
_
1 if z 6.635
0 else.
(37)
The factor 1.081 in Equation (36) further ensures the consistency of the estimator under normality.
The Weighted Standard Deviation (WSD) in (35) has a 69% eciency under normality of the r
t,i
s.
16
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Econometrics 8, 136.
19
Table 1: The impact of periodicity on the actual size of the jump test at the 5% level
Panel A. Constant Volatility Model
Periodicity? Correction? Mean

S
J
(p, k, )
t
Rejection rates
30-sec 1-min 5-min 30-sec 1-min 5-min
Case I No No 2.0006 2.0015 2.0082 5.9% 6.4% 8.0%
Case II Yes No 2.0035 2.0047 2.0194 9.2% 9.5% 10.7%
Case III Yes Yes 2.0035 2.0047 2.0194 7.3% 8.0% 10.0%
Notes: The table shows the size of the ASJ jump test under the null hypothesis of no jumps under three
cases, described in the text. The mean

S
J
(p, k, )
t
statistic (see Equation (7)) should converge in probability
to 2. We estimate periodic component f
t,i
using WSD.
Table 2: Testing the presence of jumps in the exchange rate data
Mean

S
J
(p, k, )
t
Detected daily jumps
EUR/USD
k Asymptotic Empirical j = 0.10 j = 0.05 j = 0.01
0.47 2 2 1.4533 189 162 112
0.47 3 3 1.9479 149 129 96
0.48 2 2 1.4533 198 169 119
0.48 3 3 1.9479 156 134 104
USD/JPY
k Asymptotic Empirical j = 0.10 j = 0.05 j = 0.01
0.47 2 2 1.3036 136 101 75
0.47 3 3 1.6304 94 85 61
0.48 2 2 1.3036 144 113 78
0.48 3 3 1.6304 103 89 68
GBP/USD
k Asymptotic Empirical j = 0.10 j = 0.05 j = 0.01
0.47 2 2 1.4446 170 146 103
0.47 3 3 1.8762 126 98 71
0.48 2 2 1.4446 182 154 116
0.48 3 3 1.8762 135 109 73
Notes: The table shows the results of the At-Sahalia and Jacod
(2009b) jump test. The column labeled Asymptotic presents asymp-
totic probability limits under the null hypothesis of no jumps. The
sample covers the periods from January 1, 2000 to March 12, 2010.
The sampling frequency is 1-minute. The table reports the number of
detected daily jumps. j denotes the signicance levels of the test. We
set = 4 and p = 4.
20
Table 3: Testing whether exchange rate jumps have nite or innite activity

S
FA
(p, u, k, )
t
Asymptotic Empirical
= 6 = 7 = 8 = 9 = 10
EUR/USD 2 1.6237 1.6314 1.6877 1.6430 1.7029
USD/JPY 2 1.4429 1.4733 1.5225 1.5405 1.5610
GBP/USD 2 1.5869 1.6128 1.6623 1.6829 1.7407

S
IA
(p, p

, u, , )
t
EUR/USD 2 1.2093 1.1718 1.1553 1.1326 1.1191
USD/JPY 2 1.2002 1.1954 1.1820 1.1726 1.1543
GBP/USD 2 1.1853 1.1506 1.1297 1.1172 1.1023
Notes: The table presents the empirical mean values of the nite activity
test statistic

S
FA
(p, u, k, )
t
(upper panel) and innite activity test statistic

S
IA
(p, p

, u, , )
t
(lower panel). The sample covers the periods from Jan-
uary 1, 2000 to March 12, 2010. The sampling frequency is 1-minute. For

S
FA
(p, u, k, )
t
, we set p = 4. For

S
IA
(p, p

, u, , )
t
, we set p

= 4, p = 3,
and =

/ = 2. For both tests, we choose = 0.47, and k = 2. The col-


umn labeled Asymptotic presents asymptotic probability limits under the
respective null hypotheses. In the top panel, the null is nite jumps and the
alternative is innite jumps. In the bottom panel, the null is innite jumps
and the alternative is nite jumps.
Table 4: Estimates of jump activity levels from exchange rate returns

(, , k, u)
t
= 0.47 = 0.40
= 6 = 8 = 10 = 6 = 8 = 10
EUR/USD 0.103 0.015 0.006 0.007 0.002 0.000
(0.534) (0.223) (0.138) (0.170) (0.071) (0.000)
USD/JPY 0.103 0.031 0.010 0.013 0.004 0.001
(0.525) (0.312) (0.160) (0.186) (0.100) (0.050)
GBP/USD 0.089 0.017 0.006 0.005 0.003 0.001
(0.527) (0.211) (0.117) (0.105) (0.112) (0.050)

(, ,

, u, u

)
t
EUR/USD 0.074 0.013 0.006 0.006 0.001 0.000
(0.394) (0.161) (0.106) (0.106) (0.048) (0.000)
USD/JPY 0.075 0.019 0.008 0.008 0.002 0.000
(0.391) (0.187) (0.131) (0.131) (0.059) (0.000)
GBP/USD 0.069 0.010 0.003 0.003 0.001 0.001
(0.387) (0.132) (0.081) (0.081) (0.049) (0.034)
Notes: The table displays the estimates of

(, , k, u)
t
(upper panel) and

(, ,

, u, u

)
t
(lower panel) for the EUR/USD, USD/JPY and GBP/USD
exchange rates. The sample covers the periods from January 1, 2000 to March
12, 2010. We choose k = 2,

/ = 1.5, and x p = 0. Standard deviations of


the estimators are reported in parenthesis. For nite activity processes, the test
statistics should converge in probability to zero.
21
Table 5: Quadratic variation (QV ) for the EUR/USD, USD/JPY and GBP/USD
Jump size cuto
EUR/USD = 0.09 = 0.13 = 0.19
QV
Brownian
86.47% 86.47% 86.47%
QV
big jumps
12.25% 6.46% 3.62%
QV
small jumps
1.28% 7.07% 9.92%
USD/JPY
QV
Brownian
85.68% 85.68% 85.68%
QV
big jumps
14.08% 7.45% 4.09%
QV
small jumps
0.24% 6.87% 10.23%
GBP/USD
QV
Brownian
85.71% 85.71% 85.71%
QV
big jumps
10.22% 5.27% 2.89%
QV
small jumps
4.07% 9.02% 11.41%
Notes: The table shows the fraction of quadratic
variation (QV ) attributable to the continuous and
jump components for the exchange rates. The
sample covers the periods from January 1, 2000
to March 12, 2010. We x p = 2, = 3 and =
0.47. The truncation rate is u =

f
WSD
t,i

BV
t

.
Table 6: Testing for jumps when volatility is periodic
Correction? EUR/USD USD/JPY GBP/USD
j = 0.10 j = 0.05 j = 0.05 j = 0.10 j = 0.05 j = 0.05 j = 0.10 j = 0.05 j = 0.05
= 0.47 No 189 162 112 136 101 75 170 146 103
[0.08] [0.07] [0.05] [0.05] [0.04] [0.03] [0.07] [0.06] [0.04]
WSD 156 125 82 115 91 66 141 116 74
[0.06] [0.05] [0.03] [0.05] [0.04] [0.03] [0.06] [0.05] [0.03]
= 0.48 No 198 169 119 144 113 78 182 154 116
[0.08] [0.07] [0.05] [0.06] [0.05] [0.03] [0.07] [0.06] [0.05]
WSD 169 136 91 124 96 69 150 130 81
[0.07] [0.05] [0.04] [0.05] [0.04] [0.03] [0.06] [0.05] [0.03]
Notes: The table shows the results of the base and periodicity-robust At-Sahalia and Jacod (2009b) jump
tests. We use non-parametric WSD method to estimate periodicity and correct the test. The table reports
the number of detected daily jumps and the jump proportion in brackets (100#jumps/#days). j denotes
the signicance levels of the test. We report the results for k = 2. The sample period and other parameter
values are same as in Table 2 (i.e. = 4 and p = 4).
22
ACF-Absolute 1-min returns (EUR/USD)
0 1450 2900 4350 5800
0.5
1.0
(a) EUR/USD
ACF-Absolute 1-min returns (EUR/USD) ACF-Absolute 1-min returns (USD/JPY)
0 1450 2900 4350 5800
0.5
1.0
(b) USD/JPY
ACF-Absolute 1-min returns (USD/JPY) ACF-Absolute 1-min returns (GBP/USD)
0 1450 2900 4350 5800
0.5
1.0
(c) GBP/USD
ACF-Absolute 1-min returns (GBP/USD)
Figure 1: ACF of the absolute EUR/USD, USD/JPY and GBP/USD returns at 1-minute sampling frequency. The
number of lags corresponds to 5 days of 1-minute observations.
All Days
0 300 600 900 1200
0
.
0
1
0
.
0
2
0
.
0
3
0
.
0
4
0
.
0
5
(a) EUR/USD
intraday periods
Far East opens
Europe opens
N. America opens
Europe
closes
All Days All Days
0 300 600 900 1200
0
.
0
1
0
.
0
2
0
.
0
3
0
.
0
4
0
.
0
5
(b) USD/JPY
intraday periods
Far East opens
Europe opens
N. America opens
Europe
closes
All Days
All Days
0 300 600 900 1200
0
.
0
1
0
.
0
2
0
.
0
3
0
.
0
4
0
.
0
5
(c) GBP/USD
intraday periods
Far East opens
Europe opens
N. America opens
Europe
closes
All Days
Figure 2: Mean absolute 1-min EUR/USD (left), USD/JPY (middle) and GBP/USD (right) returns on whole sample.
The X-axis represents the intraday periods in EST, from 16:01 EST of day t 1 to 16:00 EST of day t.
23
total number of large increments per intraday period (no periodicity)
0 150 300 450 600 750 900 1050 1200 1350
2.5
5.0
7.5
total number of large increments per intraday period (no periodicity)
total number of large increments per intraday period (with periodicity)
0 150 300 450 600 750 900 1050 1200 1350
1000
2000
3000 total number of large increments per intraday period (with periodicity)
total number of large increments per intraday period (WSD correction)
0 150 300 450 600 750 900 1050 1200 1350
2.5
5.0
7.5
total number of large increments per intraday period (WSD correction)
Figure 3: The number of estimated large increments retained by 1{} per intraday period (see Equation (5)). The number
of simulations is 1000 with T = 250 and M = 1440 (i.e. 1-minute sampling frequency). The data generating process
generates jumps uniformly throughout the day. In the upper and middle panels, the truncation rate is u =

. In the
lower panel, the truncation rate is u =

f
t,i

. We set = 0.47 and = 2. The details of the simulation study are


available upon request.
1.2 1.4 1.6 1.8 2.0 2.2
2
4
EUR/USD (k=2)
Brownian Motion: Present or Not?
mean S
W
=1.5670
1.5 2.0 2.5 3.0
1
2
EUR/USD (k=3)
mean S
W
=1.9977
1.2 1.4 1.6 1.8 2.0 2.2
2
4
USD/JPY (k=2)
mean S
W
=1.5805
1.5 2.0 2.5 3.0
1
2
USD/JPY (k=3)
mean S
W
=2.0301
1.2 1.4 1.6 1.8 2.0 2.2
2
4
GBP/USD (k=2)
mean S
W
=1.5447
1.5 2.0 2.5 3.0
1
2
GBP/USD (k=3)
mean S
W
=1.9625
Figure 4: Empirical distribution of the non-standardized test statistic

S
W
(p, u, k, )
t
in Equation (6) for k = 2 (left
panels) and k = 3 (right panels). The sample covers the periods from January 1, 2000 to March 12, 2010. We set p = 1
and = 8. The sampling frequency is 1-minute. Under the null that Brownian motion is present in the data, the test
statistic in the left (right) hand panels should converge in probability to k
1p/2
.
24
0 1 2 3 4 5
0.25
0.50
0.75
1.00
EUR/USD (k=2)
0 1 2 3 4 5
0.25
0.50
0.75
1.00
USD/JPY (k=2)
Jumps: Present or Not?
0 1 2 3 4 5
0.25
0.50
0.75
1.00
GBP/USD (k=2)
EUR/USD (k=2) N(0,1)
-2 0 2 4
0.25
0.50
EUR/USD (k=2) N(0,1)
USD/JPY (k=2) N(0,1)
-2 0 2 4
0.25
0.50
USD/JPY (k=2) N(0,1) GBP/USD (k=2) N(0,1)
-2 0 2 4
0.25
0.50
GBP/USD (k=2) N(0,1)
Figure 5: Empirical distributions of the non-standardized (upper panels) and standardized (lower panels) test statistics

S
J
(p, k, )
t
in Equation (7) for k = 2, p = 4, = 4. The sample covers the periods from January 1, 2000 to March 12,
2010. The sampling frequency is 1-minute. Under the null that there are no jumps, the test statistics in the upper panel
should converge in probability to 2.
0 1 2 3 4
0.25
0.50
0.75
EUR/USD (=6)
Jumps: Finite or Infinite?
mean S
FA
=1.6237
0 1 2 3 4
0.25
0.50
0.75
EUR/USD (=10)
mean S
FA
=1.7029
0 1 2 3 4
0.25
0.50
0.75
USD/JPY (=6)
mean S
FA
=1.4429
0 1 2 3 4
0.25
0.50
0.75
USD/JPY (=10)
mean S
FA
=1.5610
0 1 2 3 4
0.25
0.50
0.75
GBP/USD (=6)
mean S
FA
=1.5869
0 1 2 3 4
0.25
0.50
0.75
GBP/USD (=10)
mean S
FA
=1.7407
Figure 6: Empirical distribution of the non-standardized test statistic

S
FA
(p, u, k, )
t
in Equation (8) for the truncation
parameter = 6 (left panels) and = 10 (right panels). We set k = 2, p = 4. The sample covers the periods from
January 1, 2000 to March 12, 2010. The sampling frequency is 1-minute. Under the null of nite activity jumps, the
test statistic should converge in probability to 2.
25
0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0
2
4
Brownian Motion: Present or Not?
Ho: Brownian Motion - Empirical histogram of S
W
EUR/USD
Brownian Motion Present
No Brownian
Noise Dominates
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
0.25
0.50
0.75
Jumps: Present or Not? EUR/USD
Ho: no jumps - Empirical histogram of S
J
No Jumps
Jumps Present
Noise Dominates
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
0.25
0.50
0.75
Jumps: Finite or Infinite? EUR/USD
Ho: finite activity - Empirical histogram of S
FA
Finite Activity Jumps
Infinite Activity Jumps
Noise Dominates
Figure 7: Characteristics of the EUR/USD returns. The sample covers the periods from January 1, 2000 to March 12,
2010. The sampling frequency is 1-minute. Vertical bars denote the asymptotic probability limit of the statistics under
the respective null hypotheses.
QV due to Brownian motion
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0.25
0.50
0.75
1.00
Quadratic variation of the EUR/USD
collapse of
Lehman Brothers
QV due to Brownian motion
QV due to jumps
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0.25
0.50
0.75
1.00
QV due to jumps
QV due to big jumps
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0.25
0.50
0.75
QV due to big jumps
QV due to small jumps
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0.25
0.50
0.75
QV due to small jumps
Figure 8: The relative magnitudes of the continuous and jump components of the EUR/USD exchange rate. We x
p = 2, = 0.47, = 0.9 and = 3. The sampling frequency is 1-minute.
26
No correction (EUR/USD)
0 250 500 750 1000 1250
2
4
6
No correction (EUR/USD) WSD correction (EUR/USD)
0 250 500 750 1000 1250
2
4
6
WSD correction (EUR/USD)
No correction (USD/JPY)
0 250 500 750 1000 1250
2
4
6
No correction (USD/JPY) WSD correction (USD/JPY)
0 250 500 750 1000 1250
2
4
6
WSD correction (USD/JPY)
No correction (GBP/USD)
0 250 500 750 1000 1250
2
4
6
No correction (GBP/USD) WSD correction (GBP/USD)
0 250 500 750 1000 1250
2
4
6
WSD correction (GBP/USD)
Figure 9: The number of large increments (in logs) retained by 1{} per intraday period for EUR/USD, USD/JPY and
GBP/USD returns. In the left panels, the truncation rate is constant over the day, u =

BV
t

. In the right panels,


the truncation rate varies with intraday periodicity, u =

f
WSD
t,i

BV
t

.
27